China’s Five-Year Plan lays out a clear map of expanded and new business opportunities, and also of areas that will stagnate as they are no longer a state priority. The most recent Five-Year Plan covered eight areas. We explored the first objective last week. This week, we consider the second and third objectives of the plan.
The second objective was to keep the annual growth in R&D spending above 7%. In some ways, this is a perverse outcome of the action taken by some Western governments to severely limit co-operative research in very broadly defined so-called sensitive areas. The unforeseen outcome was that much of the China-led research has returned to China, and to the surprise of some Western governments, this has resulted in significant advances in Chinese research in areas as diverse as 3D printing, green energy and energy storage, solar energy, minerals processing, quantum computing, 6G and AI.
The momentum for R&D spending in China has been given an extra boost by US sanctions which have reduced access to a range of components used in the growing tech industry. Again, rather than hobbling Chinese growth as anticipated, it has resulted in a diversion of research into these areas to build substitute supplies and supply chains.
Singapore is less inclined to follow the US path and reduce co-operative research with China, but this is not the main focus for business. Instead, businesses must consider how they will adapt, deliver and work with technological processes that are exclusive to China. In a broad sense, it’s the equivalent of making sure that the plug on an electrical device made in Singapore is compatible with Japanese, Australian and US electrical plugs, except that this compatibility challenge is now related to software applications, APIs, programming protocols and the like.
The solutions may not be as simple as providing a different plug on the end of an electrical cord. The solutions may demand more complex regulatory, compliance and development answers that go beyond the usual adaptions that business makes for different markets. Investors will look for companies that are alert to these challenges and actively developing suitable business models.
The third objective is to keep the unemployment rate under 5.5%. The first impact of this is the way this objective expands the number of consumers with access to increased incomes. There is an assumption that this pool consists of university graduates who are not able to get jobs but this may be more a figment of Western media coverage rather than on-the-ground reality. The unemployment rate is a function of economic growth and a growing level of employment provides a larger pool of consumers who can afford new products.
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This objective simply confirms the potential growth paths for business based on a larger pool of consumer spending. No surprises here and no startling new opportunities.
Technical outlook for the Shanghai market
As with other global markets, the Shanghai Index has collapsed. The support level near 3,520 failed and the index plunged to the long-term historical support level near 3,450. The index closed below this level prior to a small rebound. Failure to hold and consolidate around 3,450 has a downside target near 3,355. This is a support level based on the lows created in 2021.
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This is a severe bear market that is driven by the retreat in US markets which has contaminated other global markets. Fast downtrends like this cannot be defined with a single trend line. The downtrend is confirmed by the relationships in the Guppy Multiple Moving Average (GMMA) indicator. The long-term group of averages have compressed and turned down. They have not yet expanded. If they remain narrowly separated, it makes it easier for a rebound to develop because the selling pressure is not well entrenched.
The wide spread in the short-term group of moving averages shows traders are feeling the market. It is this overreaction that drives this type of sharp retreat. Make no mistake, this selling activity is not just by mums and dads; but also by fund managers and institutions. It also reflects a withdrawal of US funds from the market as US investors start to repatriate capital to the US.
The key feature to look for is the behaviour of the index rather than guidance from any technical indicators. The critical features are the historical support level near 3,450 and 3,355. It is too early to know if the 3,450 will hold, but consolidation activity near this level is the required evidence. This means the index consolidates near this level, moving sideways and slightly above and below the 3,450 level.
Another fall below the 3,450 level has historical support near 3,355. Again, the key feature is consolidation behaviour near this level. During such rapid market retreats it is normal to see an “overshoot” day where the index falls below support and then rebounds to close near support. This is an exhaustion day, and the index showed this behaviour on July 28, 2002, when it dropped to a low of 3,313 before rebounding to support near 3,355.
Typical Shanghai Index behaviour shows that rebounds from these support levels can develop very rapidly.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council. He owns China stock and index ETFs
Photo: Bloomberg
